Law firms show resilience despite difficult times, Financial Benchmarking Survey shows
The survey is written and produced by the legal team at Hazlewoods LLP and sponsored by Lloyds Bank.
This research is created for our Leadership and Management Section, which brings together leaders, partners and practice managers.
The Financial Benchmarking Survey, now in its 22nd year, collected financial data from 155 small and medium-sized solicitor firms with a combined income of more than £1.1 billion.
It’s one of the largest surveys of its type in England and Wales.
What do these findings mean for firms? And how can they inform how you run your business?
Investment in staff has increased
Despite the current economic challenges and rising costs facing businesses since the pandemic, the research shows law firms continued to invest in their staff and maintained their focus on recruitment and retention.
Respondents reported an increase in fee-earner head count of 3.2% and a 2.1% increase in support staff numbers. The latter is significant as, historically, support staff are usually the first to go when times get tough.
It’s reassuring to see that firms recognise the role of support services teams when it comes to ensuring the best service for existing and potential clients.
Not only are they usually the team to provide clients with their first impression of your firm, but they can also make sure client care is efficient and properly managed.
Last year, the team at JMW Solicitors LLP shared with us why client care is at the heart of their firm, and explained how their dedicated client care team ensures the best service for existing and potential clients.
Peter Finkill-Coombs, partner at the firm, highlights the importance of consistent and efficient client care, stating: “It’s about the fundamentals, getting the basics right.
"This means following through on what you say you’re going to do, and consistently! Calling when you say you’ll call, following up with that quote you say you will. Professional, polite and pragmatic advice, each time, every time."
Retaining staff in a competitive market
In line with the head count increase, it’s unsurprising that total salary costs as a percentage of fee income also increased, rising by 0.4%, from 58.5% in 2021 to 58.9% in 2022.
Clearly, the market remains competitive for high-quality staff, and a key challenge facing all firms is the need to both attract and retain them. This, paired with recent increases in the cost-of-living, means that firms have felt greater pressure to increase salaries, which can put pressure on firm finances.
The good news is that many candidates are looking to other measures to determine whether a firm is the right fit for them.
In an article for the Leadership and Management Section, Dana Denis-Smith, chief executive officer at Obelisk Support and Law Society Council representative for women solicitors, said that, rather than simply increasing salaries, a ‘cultural reset’ is needed to tackle issues such as inclusion and accessibility to attract the next generation of lawyers.
Dana cites the 90% of lawyers surveyed for the Financial Times Innovative Lawyers 2021 report who said that there are firms they would refuse to work for, regardless of pay, because they believe the working culture would negatively impact their wellbeing.
Firms should review their approaches to flexible working, workplace culture, mental health and wellbeing, all of which have a big impact on which firms candidates are choosing to work for.
A great place to start is the Leadership and Management Section, where partners, leaders and practice managers can gain access to exclusive legal business content including resources, events and webinars.
Offsetting increased staffing costs
Overall, 75% of participants reported year-on-year growth in fee income in 2022. Nearly half of firms saw growth of more than 10%, and median practice fee income increased by 9.2%.
Meanwhile, median fee income per equity partner increased by 5.4% from £891,693 in 2021 to £939,525 in 2022.
Despite this growth, over the coming year, firms will be looking for ways to offset growing staffing costs as inflation is predicted to remain higher than usual and the cost-of-living crisis shows no signs of letting up.
There are a number of different ways to manage your firm through difficult economic times, alongside a focus on growing fee income.
Some firms may wish to consider measures such as centralising or outsourcing some internal functions, or moving towards more hybrid working and hot desking to reduce spend on office space.
Another area of focus may be increasing staff productivity.
Guidance on these initiatives and issues is available through the Leadership and Management Section.
Hours are down – is this due to productivity or something else?
The median hourly cost of a fee earner (based on 1,100 chargeable hours per year), was £111.48, and median fees per hour were £126.30.
The total number of chargeable hours was collected for the first time in the 2022 survey – it found that median number of chargeable hours had decreased compared to 2021, coming in at 841 hours.
This raises that question that some in the profession have been considering for some time:
Is the billable hour is still an effective measure of productivity, especially when considering how automation and technology can affect this.
Eugene Farrell, mental health lead at Law Society partner AXA, said in an article for the Leadership and Management Section: “Productivity can often be confused with the number of hours that an employee is working.
"If someone is staying ‘logged on’ well into the evening, when everyone else has finished for the day, it doesn’t necessarily mean that they are working harder than everybody else.
"Rather than monitoring the amount of time that someone is working for, productivity should be measured by the actual output that they are producing and the quality of their work.”
Looking to the future
“In tough economic times the resilience of law firms shines through," said Paul Bennett, chair of our Leadership and Management Section.
"Although we need to remember these findings pre-date the cost-of-living crisis, the UK’s political contortions of 2022 in terms of multiple prime ministers and of course the impact of the war in Ukraine. The results reflect the property boom of 2021 and the challenges in the service economy during 2021/2022 financial year.
“Resilience is, though, a good sign knowing as we do that firms are currently steering through the on-going choppy waters.
“Firms reviewing this year’s survey might like to consider the growth in fee income, the 10-day reduction in lockup and the median equity capital trends. These three give a great insight into fee income, collection, and capital needs: all of which will be useful to help plan ahead.
“The benchmarking aspect should help those who took part to be more profitable again. For those who did not take part, looking at the trends can help with their planning and, of course, taking part next time would ease the use of the data as every firm who participates gets a personalised summary to help them with business planning using their own data.”
Our president, Lubna Shuja, adds: “It is encouraging to see law firms continuing to perform strongly, especially given the difficult economic climate we are all facing.
“As the cost-of-living crisis hits England and Wales the legal sector will continue to be an important driver of the UK’s economy.
“It is good to see firms focusing on helping staff deal with the crisis and increasing salaries to retain and recruit staff.
“Of course, some firms struggle more than others, with lack of government investment continuing to hit legal aid firms.
"In this current crisis, lawyers are needed more than ever to help people access justice in their time of need. The government must take action to stop the shortfall in legal aid providers before it is too late.”
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